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Part VII. Dynamic support and resistance

Dynamic support and resistance - Forex School

Commander in Pips:
 Today we will discuss how MAs could be used as support and resistance lines. But they are not static support and resistance, as are lines that we’ve already discussed – rather they are dynamic support and resistance.

Some MA could act as support and/or resistance - Forex School

Pipruit:
 What does it mean – dynamic?​

Commander in Pips: It means that some MA could act as support and/or resistance. But due the fact that its value changes over time, the support and/or resistance level that is provided by this MA will also drift with it and change in time. Since the MAs value depends on price action, hence support and/or resistance depends on it also. Many traders use this property of MA and act as follows:

1. When price is above MA (trend is bullish) – they will buy when price dips to MA and test its support;

2. When price is below MA (trend is bearish) – they will sell when price pops up to MA and test its resistance;

3. Usually for this purpose longer period MAs are used, with a period above 25. The most common are 50-period and 200-period MAs. But the choice of MA period is very personal and depends on the trading style and strategy of particular trader.

Take a look at the chart – here I’ve plotted a 50x5 DMA. You know that I like displaced MAs. Look, during the uptrend it acts like support, and holds the market every time, when it dips to it. Here you can see what “dynamic” means. When trend changes and price has moved below the MA – it becomes resistance, like a simple line. We’ve discussed this property before.

Chart #1 GBP/USD Weekly and 50x5 DMA
MAs value depends on price action - Forex School
Pipruit: Yes, I remember that. Cool. But I see, that it doesn’t hold price perfectly – the market has penetrated it sometimes…​

Commander in Pips: You’re right. In fact, our MA has the same properties as a simple support/resistance. Remember, what we’ve said about them? We should treat them not as a precise value, but more like an area. And this area will be wider as we get into longer time frames. This is a weekly chart, so, I think that such penetrations will happen, and that we can see here are admissible.

Pipruit: Oh yes, I’ve a forgotten that bit. Thanks Sir. Also I have another question, Commander. Previously we’ve said that it is possible to use couple of MAs for trend estimation, so, could we use couple of MA somehow? Just to smooth these splashes outside the MA – they put me in a flurry, because you never know – will it be just a fake out or a real breakout.​

Commander in Pips: For that purposes we must use stop losses… But ok, there is one method with applying two MAs, so, may be you’ll like it. It very similar to using two MAs for trend identification – while the market stands in the range between two MAs, despite at different splashes – you should hold position. Other words, the area between those MAs treated as area of support or resistance. The market could move inside it – this is not the problem, the major event is when the market will break through it. In this case you should change your position to the opposite.

Chart #2 | 4-hour EUR/USD 7x5 and 25x5 DMA
While the market stands in the range between two MAs, despite at different splashes, you should hold position - Forex School
Here you can see, that although market has penetrated the red line (7x5 DMA) many times, but it was held inside the support zone – area between the 25x5 DMA (blue line) and the 7x5 DMA. But at the top, the market finally has broken through this area.

Pipruit: I understand. Well, I think that this approach is more suitable for me.​

Commander in Pips: This is important by the way – to find the application of different tools that is most suitable for you.

And finally, we have to say, that although MAs could hold the market for a long time, sometime they will be broken, just in the same manner as simple support or resistance lines. You can see this on chart #1 – This MA has held the market in a long bull trend, but in 2005 it was broken and the MA has acted as resistance. The same has happened in 2008 – when market has tested twice the resistance of MA, it has turned into a tremendous bear trend.

Pipruit: Yep, I see it, Sir. Still, MA has a very attractive feature – it plots automatically and is updated in real-time, so I do not have to look back to find support and resistances as with simple support/resistance lines. But the major question still remains – which one MA to choose, that will better indicate support and resistance for the current pair and time frame.

Comments

FOREXHAWK
8 years ago,
Registered user
Dynamic support and resistance chapter 11 part vii

Commander

I am a little confused in your example of chart 1 showing a 50x5 Dma there is only one curve I was expecting the second displaced curve ie a tracing of the 50x5 to catch the false breakouts. can uou please explain why this is showing or have I misunderstood the same applies on chart 2 which uses the envelope between 7x5 and 25x5 DMA's.
thank you
EricBubb
8 years ago,
Registered user
An excelent series of articles

I have wasted money on trading courses read many a book. Not able to find the question to ask to resolve my ponderings regarding trading.

This series of lessons has put everything into prospective.

I have been trading in test for a month made two loss which were my own fault. The other 10 trades have all bee very profitable.:D

I use fib select the A-B move then B-C retrenchment.
Wait for my trend line to be broken below the close of the previouse candel.
Then enter the trade if the stockastic is in agrement it's a plus.
Sive Morten
8 years ago,
Registered user
> Commander

I am a little confused in your example of chart 1 showing a 50x5 Dma there is only one curve I was expecting the second displaced curve ie a tracing of the 50x5 to catch the false break..

Hi Hawk,
not quite. THe point is that long-term MA could be support/resistance itself, without the second shorter MA. Sometimes, breakout through long-term MA, for instance 25x5 on monthly time frame after long solid previous move in other direction could signal about changing the long term trend.
This is just two different approaches. You may try both of them.
saravan kumar
8 years ago,
Registered user
thanku sive

Thanku Sive for the excellent coaching,very personal,simple ,
consistent and patient. Though the market is a giant, definitely we are getting armed to protect ourselves first and then move forward to make gains.

Thanku so much
saravan Kumar

:)
FOREXHAWK
8 years ago,
Registered user
Thanks commander you are rare breed thaat can offer a comprehensive course such as this one before your course I had a lot of different knowledge chunks but you show the parts that allow it all to be joined up and make sense

Thank You
Hamza Samiullah
2 years ago,
Registered user
very informative...
One-fm
11 months ago,
Registered user
Great piece.

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